The government should be honest with voters that intervention to keep coal-fired power stations open is a poor solution to high wholesale electricity prices, a new Grattan Institute report says.
Photograph: Ashley Cooper/Getty Images

Australia’s high wholesale electricity prices are the “new normal” and politicians need to be honest with voters about it, the Grattan Institute thinktank says.

It says federal and state governments must tell voters that government intervention to keep ageing legacy assets – such as old coal-fired power stations – working is a poor long-term solution and the problem can only be fixed with credible, bipartisan energy and climate change policy that encourages new investment.

The National Electricity Market (Nem) is the network of transmission lines and cables spanning Australia’s eastern and south-eastern coast, delivering electricity to Queensland, New South Wales and the ACT, South Australia, Victoria, and across the Bass Strait to Tasmania.

The Grattan Institute says wholesale electricity prices rose across the Nem by 130% on average between 2015 and 2017, with household bills in some states increasing by up to 20% in 2017 alone.

It says that happened for three underlying reasons:

1. Two big, old, low-cost, coal-fired power stations closed (Northern in South Australia in 2016, and Hazelwood in Victoria in 2017), reducing supply and pushing prices up. This accounted for about 60% or $6bn of the increase in the value of electricity traded annually in the Nem between 2015 and 2017.

2. The cost of key inputs, especially gas but also black coal, rose just when the plants they fuel were needed more often, pushing prices up further. This accounted for nearly 40% of the increase in wholesale prices between 2015 and 2017.

3. Generators were “gaming” the system: using their power in concentrated markets to create artificial scarcity of supply and so force prices up. The Grattan Institute says gaming is completely legal within the current market rules and may add as much as $800m to the value of electricity traded in the Nem in some years. It says gaming has occurred in Queensland and South Australia, there are signs of it in Victoria since the closure of Hazelwood, and it could appear in NSW as supply tightens with the scheduled closure of the Liddell coal-fired power station in 2022.

The Grattan Institute says those events mean wholesale prices are unlikely to return to previous levels of around $50 per megawatt hour.

Its report, written by Tony Wood and David Blowers, makes five recommendations for governments.

It says the Turnbull government, working with the states, must provide bipartisan, credible energy and climate-change policy to underpin new investment in the Nem.

“The national energy guarantee (Neg) would help, and should be endorsed. Government intervention in the market, actual or threatened, should be unnecessary,” the report says.

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It says state governments should implement the recommendations of the ACCC’s east coast gas inquiry from 2016, which includes lifting the current moratoria on gas exploration and considering gas development projects on a case-by-case basis.

It says the Australian Energy Market Commission (AEMC) should also change market rules to address “gaming” that results in artificial price spikes. They say the AEMC should investigate a gate-closure mechanism to eliminate inefficient late rebidding.

It also says federal and state politicians must be honest about the likelihood that higher wholesale price expectations are the new normal.

Tim Buckley, from the Institute for Energy Economics and Financial Analysis, told Guardian Australia wholesale electricity prices would come down in the long term if the current “energy policy failure” was resolved and new renewable energy and pumped hydro storage capacity were to be added to the system.

“But retail electricity prices in Australia are unlikely to come down materially any time soon,” Buckley said.

“Wholesale generation costs are 10-20% of the total retail price of electricity. The grid transmission and distribution [T&D] is 50% of the retail price total – so gold plating of T&D is the real reason retail electricity prices are at record highs, and likely to stay there.”

He said the Turnbull government’s Neg “does nothing to resolve the ridiculous over-investment in the wrong type of T&D”.